When you shop at a car dealership, watch out for expensive add-ons and costly financing. Often items like extended service contracts, “theft etch” and “GAP” are a rip-off, and usually you can get a better rate on the financing yourself, by shopping around.
For example, many service contracts and extended warranties have fine print that excludes “pre-existing conditions.” So if the engine blows, your claim may be denied when the provider blames the problem on a lack of maintenance by a prior owner, or a component that was supposedly faulty when you bought the car.
How much extra do add-ons and dealer-arranged financing cost? They can add $5,000 or more to the price of a car, without adding any real benefit. Of course, car dealers push add-ons aggressively because they are so profitable — for them.
According to Automotive News, in the first quarter of 2018, AutoNation, the country’s largest new car dealership chain, averaged a gross “finance and insurance” profit of $1,779 per unit sold. That’s just their profit.
Bottom line: If you want to save big, it’s smart to get your own financing and decline the high-cost / fat-profit / low value add-ons.
2012 was the most profitable year EVER for auto dealers, according to an annual study by the National Automobile Dealers Association. The study found that profits at the average U.S. dealership rose to over $2,036,000 in today’s dollars. — Automotive News, July 8, 2012
High-cost service contracts are major profit centers for auto dealers. One dealer told Automotive News that in 2005 his gross profit per extended service contract was $436. By the end of last year, it had skyrocketed to $1,178. (Automotive News, March 11, 2013)
Consumers anxious to avoid unexpected, costly repairs often buy them without realizing they are usually full of loopholes and exclusions that allow companies to deny coverage. For example, they usually fail to cover prior damage, even if that’s the cause of the problem.
Some auto dealers pressure their finance managers to meet a quota of service contract sales, or be fired. Others have tried to sell service contracts at lower, more competitive prices, but then faced litigation by the companies that offer them.
Some dealers mislead car buyers into thinking that they have to buy a service contract in order to get financing. Legal experts say that such deception is illegal, but can be difficult to prove.
CARS recommends that, instead of getting a service contract, it’s smarter to spend about $000 for a thorough inspection before you buy. Then if the car has major problems, you can decide if you still want it, or take your business somewhere else. Also — beware of dealers who try to sell you service contracts that kick in at the same time as the warranty, and expire just when you might need them.